Victoria must do more to help those shut out of traditional banking

VanCity Credit Union has a new small loan program that is encroaching on the turf that has long been occupied by ultra-high-cost payday loan shops. Columnist Don Cayo sees this as a significant and worthy development.

VANCOUVER — A reasonable-cost alternative to sky-high rates for payday loans may help some cash-strapped British Columbians, but it won’t shut the door on a credit trap that snares tens of thousands a year, says a lawyer who specializes in loan litigation.

Which is too bad, because there is a long history of down-on-their-luck borrowers without access to conventional credit getting no help at all from B.C. officialdom.

The newest development, reported Wednesday by my colleague Kevin Griffin, is a Vancity plan to offer “Fast & Fair” short-term loans of up to $1,500. Interest on $300 for two weeks will be $2.20, or about 19 per cent annually, compared to as much as $69, or about 600 per cent annually, at a legal payday loan outlet.

There are two catches likely to limit this lending program’s impact on a large-scale problem. One, noted by Vancity in its announcement, is that the loans will be offered only to the credit union’s members — not quite half a million, or one British Columbian in every nine or 10.

The other, predicted by Mark Mounteer — a lawyer with the Vancouver firm of Hordo, Bennett, Mounteer, which specializes in loan-related class-action suits — is that at those rates Vancity simply won’t be able to cover its costs if it takes on many of the hard-core users of payday loans.

While some payday loan users have good track records for repayment, he said, many do not. They default so often that most payday lenders won’t deal with them any more, even at interest rates equivalent to 600 per cent a year.

But if Vancity, or any other financial institution that cares to emulate it, can provide relief for even a minority of borrowers, it will be welcome news.

According to Consumer Protection B.C., 100,000 British Columbians took out 800,000 payday loans last year. Many of them do not seem to fit the profile the industry likes to promote of people who are happy to pay a premium for the convenience of quick cash.

Pollster Mario Canseco, whose Insights West company did an extensive survey for Vancity, says 35 per cent of these borrowers took out loans at least once a month, sometimes more. Thirty-eight per cent said the money was to cover unexpected expenses, while 37 per cent were behind on bills, and an additional 22 per cent had loan payments they couldn’t cover. This last group appears to be, almost by definition, in a credit trap.

The province’s reaction? Five years ago it passed legislation to make life more comfortable for payday lenders — it granted a special exemption to increase the maximum interest rate these companies could charge from 60 per cent a year, the highest interest allowed by the Criminal Code, to 600 per cent.

The problem had been that neither the police nor Consumer Protection B.C. ever enforced the 60-per-cent limit in the days before the law changed. So my thought in 2009 when the law changed was that our provincial government had done absolutely nothing to change circumstances for those caught in a credit trap.

It turns out I was wrong — hindsight makes clear that they made a bad situation even worse.

Mounteer notes that dozens of class-action civil suits, most launched by his firm, have succeeded over recent years in recovering many millions of dollars that loan clients were overcharged. But these cases date back to the period before the law changed. Now, with 600 per cent made legal, there is no likelihood that customers who have paid outrageous, but legal, rates will get a little money back some years down the road.

The answer isn’t to cap the allowable rate so low that no one lender can afford to deal with hard-to-serve borrowers. But other jurisdictions in Europe, the U.S. and even other provinces have much lower caps than B.C., and their credit systems still function.

So Vancity should be applauded for its initiative. And the province, which in past failed to lower the boom on high-cost lenders, should now at least lower the cap.

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